A mortgage ties you with a long repayment plan. There is always a risk of struggling with payments due to a sudden and unexpected change in your financial circumstances. For instance, if you lose your job, you will certainly find it challenging to keep up with mortgage payments. Falling behind on payments could result in adverse consequences. Not only will you lose your credit points, but you will also lose your house. It is enjoined that you carefully plan your finances to avoid racking up a mortgage debt.
Undoubtedly, it could be challenging and frustrating to discharge your mortgage, especially when your financial condition is not up to scratch. If your current finances are in order, you still cannot take a guarantee of your future financial condition. Therefore, it makes sense to discharge your mortgage sooner rather than later.
Strategies to discharge your mortgage early
Here are the strategies to discharge your mortgage early:
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Regular overpayments
Regular overpayments mean paying more than the agreed instalment. Bear in mind that you cannot start overpaying without keeping your lender in the loop. Overpayment will result in extra charges. Make sure that your contract allows you to repay the mortgage earlier. There are two ways to make overpayments on your mortgage.
- You will have to ask your mortgage provider to increase the direct debit amount each month.
- Set up a standing order to pay above the agreed instalment every month.
You can avoid paying fees and additional charges if you put in the request for overpayment beforehand. Your lender must know that you feel inclined to pay over and above the agreed amount. Mortgage providers will likely accept your offer if your monthly income has gone up.
Remember that you will not be able to increase your payment each month unless your income becomes better than before. Make sure that you ask your mortgage provider about all the formalities and documents you will need.
A mortgage provider might carefully assess your income sources, and if they find that your current budget does not have enough money to adhere to a revised repayment plan, they will not change it for you.
However, there is a possibility of overpaying at least one or two months in order to reduce the mortgage payment. Even if you feel inclined to pay one or two instalments more than the agreed amount, you need to inform your mortgage lender beforehand. It is vital to seek their permission, without which you would not be able to process the additional amount. Remember that the extra payment is not part of your contract, so even if your lender approves of it, you have the right to cancel it at any time.
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A lump sum payment
Regular over-repayments do not appeal to everyone. Some buyers do not see a significant reduction in their mortgage size by making regular overpayments. So, they decide to pay down a lump sum payment every now and then. One of the benefits of making a lump sum payment is that your mortgage principal will quickly abate.
Since the mortgage amount is reduced, the interest charged on the outstanding balance would be smaller over time. Bear in mind that this would be regarded as an early repayment. You cannot decide to pay off your mortgage balance before the time on your own. You will have to keep your mortgage provider in the loop.
Make sure that your contract gives you the right to pay off the mortgage early. Early repayment of a mortgage is subject to early repayment charges. If your contract allows for early payment, you should go ahead with it. Otherwise, you will have to pay early settlement fees.
Lenders normally charge early settlement fees in order to abate the loss as a result of reduced profits in the form of interest income. If you think that your budget has wiggle room to make significant mortgage payments in advance, you should go for it despite early settlement charges. Make sure that you carefully calculate the cost of the early settlement, which is not more than the interest you are to pay otherwise. As long as you are saving some money in interest, you should opt for early settlement of your mortgage.
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Shorten your mortgage term
Most of the mortgage users prefer reduced monthly instalments as they are more manageable. In some cases, for instance, when you have loans for bad credit with no guarantor from a direct lender, it makes sense to have reduced monthly payments. But the fact is that the reduced monthly instalments will cost you too much money in the long run. You will take too much time to discharge your mortgage. The longer the repayment period, the more money will be accrued on the outstanding balance. As a result, you will end up paying a lot more money as interest.
You should always try to choose a smaller repayment term. Lenders generally prefer longer repayment terms, but you can insist on the shorter one. Remember that a shorter repayment plan will increase your monthly instalment size. Your budget must be able to meet this expense without compromising on your essential expenses. Otherwise, you will end up borrowing money for recurring payments and fall into an ongoing cycle of debt.
When refinancing your mortgage, you will switch to a shorter repayment plan. Make sure you do not borrow more money for home refurbishment. Increasing the size of debt will not benefit you at all. In fact, you will find it extremely hard to adhere to payments.
Things to consider while settling your mortgage early
Undoubtedly, the idea of paying off your mortgage early is a good idea because it helps you lower your interest payment in total, but there are a few things you need to consider:
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Can you actually overpay?
The first thing you need to look at is whether your budget has wiggle room to overpay. There is no point in early settlement of a mortgage if you face complications while meeting your regular expenses. If you are to pay early repayment charges, make sure that you still save money in interest you would be paying otherwise.
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Do you have debts to pay off?
If you have other debt to pay off in addition to a mortgage, you would certainly find it a bit complicated to stick to payments. Review your budget and evaluate if you can clearly manage all debts despite overpaying your mortgage.
Experts normally suggest that you consult a financial advisor before making this decision. Sometimes, borrowers feel overwhelmed by the mortgage amount and feel disposed to overpay even if they cannot stick to regular mortgage payments down the line.
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Do you have a safety net?
You should never ever make the mistake of overpaying your mortgage if you have not built enough savings for a rainy day.
The bottom line
Before you plan to overpay your mortgage, make sure that you have carefully analysed your budget and that early repayment charges will not neutralise the money you will save in interest payments. Carefully evaluate your overall financial condition so you do not regret it in the end. Consult a financial advisor if you are unable to decide whether or not to pay off your mortgage early.
